This
is
in
response
to
your
request
on
behalf
of
The
May
Department
Stores
Company
(May
Company)
for
an
advisory
opinion
under
Title
I
of
the
Employee
Retirement
Income
Security
Act
of
1974,
as
amended
(ERISA).
Specifically,
you
ask
whether
May
Company’s
vacation
pay
program
(Program)
is
a
“payroll
practice”
within
the
meaning
of
Department
of
Labor
(Department)
regulation
at
29
C.F.R.
§
2510.3-1(b)(3)
and,
therefore,
not
an
employee
welfare
benefit
plan
within
the
meaning
of
section
3(1)
of
Title
I
of
ERISA.

You
provided
the
following
facts
and
representations
in
support
of
your
request.
The
Program
provides
the
employees
of
May
Company
and
its
divisions,
subsidiaries,
and
affiliates,
with
vacation
benefits.
The
Program
operates
on
an
annual
basis.
A
“vacation
year”
begins
on
May
1
and
goes
through
April
30.
Employees
must
satisfy
a
waiting
period
to
become
eligible
for
benefits.
The
level
of
benefits
under
the
Program
is
based
on
the
employee’s
rate
of
compensation
and
years
of
service.
Employees
receive
50%
of
their
maximum
vacation
entitlement
on
May
1
of
the
vacation
year
and
the
remaining
50%
of
their
maximum
vacation
entitlement
on
September
1
of
the
vacation
year.
Vacation
benefits
are
“vested”
in
that
employees
who
terminate
employment
for
any
reason
other
than
retirement
during
the
year
will
be
paid
any
earned,
but
unused,
vacation
pay
for
that
year.
However,
earned
vacation
pay
that
is
not
used
during
the
12-month
period
beginning
on
May
1
is
not
carried
over
from
year
to
year.
You
advise
that
the
Program
covers
approximately
117,000
employees.

You
represent
that
May
Company
established
a
trust
(Trust)
between
itself
and
the
Bank
of
New
York,
as
Trustee,
as
a
tax
exempt
VEBA
trust
under
section
501(c)(9)
of
the
Internal
Revenue
Code
(Code)
to
hold
assets
to
fund
vacation
benefits
under
the
Program.(1)
You
advise
that
vacation
benefits
are
always
paid
by
May
Company
and
reimbursed
by
the
Trust
through
the
use
of
an
“advance
and
recapture”
arrangement.
Specifically,
vacation
benefits
under
the
Program
are
paid
directly
to
employees
from
the
general
assets
of
May
Company
through
its
existing
payroll
system,
and
May
Company
at
the
end
of
each
month
submits
a
statement
to
the
Trustee
requesting
reimbursement.
The
Trust
document
provides
that
as
soon
as
reasonably
possible
after
receipt
of
the
request,
the
trustee
must
pay
the
amount
requested
to
the
applicable
May
Company
division,
subsidiary,
or
affiliate
participating
in
the
Program
as
an
Employer.
The
Trust
document
also
provides
that
the
trustee
“shall
make
payments
only
to
an
Employer,
and
the
Trustee
shall
not
be
directed
to
make
payments
to
Eligible
Employees
from
the
Trust.”

You
represent
that
the
Trust
is
funded
exclusively
by
employer
contributions
and
earnings
thereon.
You
indicate
that
the
May
Company
historically
has
made
a
lump-sum
contribution
to
the
Trust
at
the
beginning
of
each
vacation
year.
The
contribution
and
earnings
are
intended
to
be
sufficient
to
reimburse
the
May
Company
for
vacation
benefits
paid
under
the
Program
for
the
year
as
well
as
cover
the
Trust’s
administrative
expenses.
With
each
monthly
reimbursement,
you
advise
that
the
amount
held
in
the
Trust
is
intended
to
steadily
decline
to
zero
by
the
end
of
the
year.
You
indicate
that
May
Company
contributes
on
a
discretionary
basis
and
does
not
have
a
legal
obligation
to
contribute
to
the
Trust.
Specifically,
the
trust
document
provides
that
“each
Employer
shall
contribute
to
the
Trust
such
amount
or
amounts
as
the
Employer
may
determine
from
time
to
time.”
You
also
indicate
that
under
the
terms
of
the
Program,
the
May
Company
would
be
obligated
to
pay
eligible
employees
vacation
wages
under
the
Program
regardless
of
whether
there
are
sufficient
funds
in
the
Trust
to
reimburse
May
Company.

Section
3(1)
of
Title
I
of
ERISA
defines
the
term
"employee
welfare
benefit
plan"
to
include:
[A]ny
plan,
fund,
or
program
which
was
heretofore
or
is
hereafter
established
or
maintained
by
an
employer
or
by
an
employee
organization,
or
by
both,
to
the
extent
that
such
plan,
fund,
or
program
was
established
or
is
maintained
for
the
purpose
of
providing
for
its
participants
or
their
beneficiaries,
through
the
purchase
of
insurance
or
otherwise,
(A)
medical,
surgical,
or
hospital
care
or
benefits,
or
benefits
in
the
event
of
sickness,
accident,
disability,
death
or
unemployment,
or
vacation
benefits,
apprenticeship
or
other
training
programs,
or
day
care
centers,
scholarship
funds,
or
prepaid
legal
services,
or
(B)
any
benefit
described
in
section
302(c)
of
the
Labor
Management
Relations
Act,
1947
(other
than
pensions
on
retirement
or
death,
and
insurance
to
provide
such
pensions).

In
regulation
section
29
C.F.R.
§
2510.3-1,
the
Department
clarified
the
definition
of
“employee
welfare
benefit
plan”
by
describing
certain
arrangements
that
would
not
constitute
employee
welfare
benefit
plans
within
the
meaning
of
section
3(1).
Section
2510.3-1(b)(3)
describes
certain
exempt
payroll
practices,
and
specifically
provides
that
an
employer
program
of
compensating
employees
for
vacation
benefits
out
of
the
employer's
general
assets
is
not
a
welfare
plan
covered
under
Title
I
of
ERISA.
In
the
preamble
of
the
regulation,
the
Department
stated
that
“[s]ection
2510.3-1(b)
distinguishes
welfare
plans
from
employer
payroll
practices
which,
although
related
to
benefits
described
in
[section
3(1)
of
ERISA],
are
more
closely
associated
with
normal
wages
or
salary.”
If
vacation
benefits
are
paid
from
a
source
other
than
the
general
assets
of
the
employer,
the
conditions
of
the
safe-harbor
regulation
are
not
met.

In
this
case,
we
are
unable
to
conclude
that
the
Program
meets
the
conditions
for
being
a
payroll
practice
under
the
regulation.
Although
the
vacation
pay
is
distributed
directly
from
the
general
assets
of
May
Company,
in
the
Department’s
view,
the
regulation’s
safe
harbor
for
general
asset
vacation
pay
payroll
practices
does
not
reach
programs
such
as
the
May
Company’s
that
include
a
VEBA
Trust
dedicated
to
the
vacation
pay
benefits.
However,
vacation
pay
programs
that
fail
to
satisfy
all
of
the
conditions
of
the
regulation
are
not
necessarily
covered
by
Title
I
of
ERISA.
Rather,
such
programs
are
subject
to
further
evaluation
under
section
3(1)
of
ERISA
to
determine
whether
the
program
includes
the
requisite
elements
to
constitute
an
ERISA
employee
benefit
plan.

In
that
regard,
the
Supreme
Court
in
Massachusetts
v.
Morash,
490
U.S.
107
(1989),
stated
that
ordinary
vacation
benefits
are
not
“analogous
to
other
welfare
benefits,
in
which
either
the
employee's
right
to
a
benefit
is
contingent
upon
some
future
occurrence
or
the
employee
bears
a
risk
different
from
his
ordinary
employment
risk.”
Id.
at
116.
The
Court
also
noted
that
extensive
state
regulation
of
vesting,
funding
and
participation
rights
of
vacation
benefits
may
afford
more
protection
for
vacation
benefits
than
ERISA,
and
indicated
a
reluctance
to
cause
their
preemption
in
situations
where
not
clearly
indicated.
Id.
at
119.
Although
the
Morash
court
observed
that
“the
creation
of
a
separate
fund
to
pay
employees
vacation
benefits
would
subject
a
single
employer
to
the
regulatory
provisions
of
ERISA[,]”
the
discussion
in
Morash
suggests
that
the
mere
presence
of
a
trust
or
other
separate
account
from
which
an
employer
reimburses
itself
for
vacation
pay
should
not
automatically
result
in
ERISA
coverage
in
the
absence
of
the
trust
providing
genuine
protections
to
the
accrued
benefits
under
the
plan
or
otherwise
presenting
risks
ERISA
was
intended
to
address.(2)

Accordingly,
in
the
Department’s
view
as
recently
articulated
in
Advisory
Opinion
2004-08,
to
determine
whether
the
use
of
a
trust
or
other
separate
account
in
a
vacation
pay
program
such
as
May
Company’s
should
result
in
the
program
being
treated
as
an
“employee
benefit
plan”
subject
to
Title
I
of
ERISA,
the
program
should
be
evaluated
to
determine
whether
the
trust
is
a
bona
fide
separate
fund,
whether
the
trust
has
the
direct
legal
obligation
to
pay
benefits
under
the
plan,
whether
there
is
a
contribution
obligation
enforceable
against
the
employer,
and
whether
contributions
are
actuarially
determined,
established
through
collective
bargaining,
or
otherwise
bear
a
relationship
to
the
plan’s
accruing
liability.(3)

Although
a
bona
fide
separate
fund
exists
in
this
case,
May
Company,
and
not
the
Trust,
is
liable
for
the
payment
of
vacation
wages.
The
principal
function
of
the
Trust
is
to
reimburse
the
May
Company
for
vacation
benefits
paid
under
the
Program
for
the
year.
In
fact,
the
Trust
document
provides
that
the
trustee
“shall
make
payments
only
to
an
Employer,
and
the
Trustee
shall
not
be
directed
to
make
payments
to
Eligible
Employees
from
the
Trust.”
The
employees’
right
to
vacation
pay
benefits
under
the
Program
is
not
dependent
on
the
amount
or
frequency
of
employer
contributions
to
the
Trust
or
level
of
assets
in
the
Trust.
Under
the
terms
of
the
Program,
employees
do
not
receive,
nor
would
they
have
any
rights
to
receive,
vacation
payments
directly
from
the
Trust,
even
if
the
employer
were
to
become
insolvent,
nor
will
their
entitlement
to
benefits
be
affected
if
the
Trust
were
terminated.
May
Company
contributes
on
a
discretionary
basis
and
there
is
no
contribution
obligation
enforceable
against
the
employer.
There
are
no
employee
contributions
to
the
Trust.
The
fact
that
the
May
Company
voluntarily
makes
an
annual
contribution
into
a
tax
exempt
trust
calculated
to
cover
its
vacation
pay
liability
under
the
Program
for
the
year
does
not
in
and
of
itself,
in
the
Department’s
view,
make
the
Program
“analogous
to
other
welfare
benefits,
in
which
either
the
employee's
right
to
a
benefit
is
contingent
upon
some
future
occurrence
or
the
employee
bears
a
risk
different
from
his
ordinary
employment
risk.”
Morash,
490
U.S.
at
116.
Consequently,
in
light
of
the
relevant
factors
mentioned
above
and
based
on
the
information
you
supplied,
it
is
the
view
of
the
Department
that
the
Program
is
not
an
employee
welfare
benefit
plan
within
the
meaning
of
section
3(1)
of
ERISA.

This
letter
constitutes
an
advisory
opinion
under
ERISA
Procedure
76-1,
and
is
issued
subject
to
the
provisions
of
that
procedure,
including
section
10
thereof
relating
to
the
effect
of
advisory
opinions.

Sincerely,
John
J.
Canary
Chief,
Division
of
Coverage,
Reporting,
and
Disclosure
Office
of
Regulations
and
Interpretations

The
trust
document
states
that
May
Company
may
decide
to
fund
the
Trust
to
provide
other
benefits
permitted
under
section
501(c)(9)
of
the
Internal
Revenue
Code.
You
advised
that,
to
date,
only
vacation
pay
benefits
have
been
funded
through
the
Trust.
You
also
advised
that
the
Internal
Revenue
Service,
by
letter
dated
May
26,
2002,
determined
the
Trust
to
be
exempt
from
federal
income
tax
under
section
501(a)
of
the
Code
as
an
organization
described
in
section
501(c)(9)
of
the
Code.

For
example,
in
emphasizing
that
the
decision
concerned
vacation
benefits
paid
from
the
general
assets
of
the
employer,
the
court
observed
that:
“An
entirely
different
situation
would
be
presented
if
a
separate
fund
had
been
created
by
a
group
of
employers
to
guarantee
the
payment
of
vacation
benefits
to
laborers
who
regulatory
shift
their
jobs
from
one
employer
to
another.
Employees
who
are
beneficiaries
of
such
a
trust
face
far
different
risks
and
have
far
greater
need
for
the
reporting
and
disclosure
requirements
that
the
federal
law
imposes
than
those
whose
vacation
benefits
come
from
the
same
fund
from
which
they
receive
their
paychecks.”
Morash,
490
U.S.
at
120.
See
also
Alaska
Airlines,
Inc.
v.
Oregon
Bureau
of
Labor,
122
F.3d
812
(9th
Cir.
1997)
(use
of
an
“advance
and
recapture”
trust
in
a
single
employer
program
did
not
convert
the
sick
leave
program
into
an
ERISA
covered
plan);
Czechowski
v.
Tandy
Corp.,
731
F.
Supp.
406
(N.D.
Cal.
1990).

This
letter
should
not
be
read
as
expressing
any
view
on
whether
an
ERISA
covered
plan
providing
other
welfare
benefits
through
a
trust
or
other
separate
fund
in
an
“advance
and
recapture”
arrangement
would
be
treated
as
holding
plan
assets.
See
Advisory
Opinion
92-24A
(Nov.
6,
1992)
and
Advisory
Opinion
99-08A
(May
20,
1999).